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His right arm outstretched towards the audience, George Walker switches his gaze like clockwork between the handful of active bidders in the crowded room, as he goads them onwards and upwards. “Go on, sir, you’ve bought the train ticket. It’ll be a lonely ride home without a contract in your pocket,” he urges, gavel poised over the lectern.
The bidding rises rapidly in £5,000 increments, until Mr Walker’s hammer falls and the prize is carried off for £650,000. Attention swiftly moves on to the next lot, one of 170 to be put up for sale that day.
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From his perch in the swanky surroundings of the Berkeley Hotel in London’s Knightsbridge, one might expect Mr Walker, a partner at auctioneers Allsop, to be selling exquisite paintings, lustrous antiques or highly prized jewellery. In fact, these objects of desire are more mundane: commercial premises ranging from banks, supermarkets and shoe shops to pubs and kebab houses.
To those lined up in front of Mr Walker, though, there is nothing remotely dull about this asset class, which offers the chance to own income-enriching buildings across the UK and collect rent cheques from some of the biggest and most reliable brand names in the country.
Commercial property is an investment wallflower compared with buy-to-let, which has hogged the limelight among Britain’s amateur property investors for nearly two decades. But policymakers’ efforts to douse demand for the latter through higher taxes and new limits on reliefs — as well as rising house prices — is prompting fresh scrutiny of the former. FT Money assesses whether this specialist asset class could find renewed favour with investors.
Unfamiliar territory
Why has commercial property failed to match the dizzy trajectory of buy-to-let over the past two decades? “It’s always been clouded in mystery,” says Mr Walker, speaking to the FT in the lunch break between bidding sessions. “Everyone can relate to a flat because we’ve all rented one. They see a Starbucks or a Johnsons dry cleaners as something risky.”
But for those willing to put their money into the niche, the rental yields can be attractive. Mr Walker cites a residential flat for rent in Fulham, which might produce a yield of at most between 2 and 3 per cent, excluding capital growth. In contrast, the average yield on high street shops sold through Allsop is 6.25 per cent. “You might get five years straight on the lease and four cheques a year. The first time investors go into the market they can’t believe it. Is it that easy?”
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Broadly speaking, the commercial market is in some ways the inverse of residential, where the value of a property resides in its vacant possession. The success of a commercial investment, by contrast, is often determined by the quality and longevity of the business tenant.
Unlike buy-to-let, where a lease might run for six months or a year, commercial leases are traditionally longer — one of the chief attractions for people seeking a reliable, long-term income stream. But the days when a buyer might expect to get a 20-year commercial lease as standard are over, says Tom Entwistle, founder of Landlord Zone, a website portal for landlords.
“Some of the big businesses will take on long leases but even they will be careful,” he says. “They have come down to 10 or five years. For a lot of businesses, three years would count as a long lease.” Banks and supermarkets have become much smarter about structuring leases with break clauses and other means of maximising their flexibility, he adds, sometimes to the landlord’s cost.
Choosing the right sector may give investors added reassurance. Convenience stores, for instance, have been stable providers of rental income in recent years, Allsop says, since by definition they require a physical presence near homes — unlike betting shops or banks, which can move online or consolidate their operations.
One of the biggest challenges that commercial property investors have faced has been the fallout from a period of shopping centre development in towns and cities, driven by overblown expectations of retail demand. Cities such as Derby, Nottingham, Rotherham or Newport have an excess of commercial property relative to shopper numbers — a reason why many investors prefer to focus their energies on smaller market towns such as Tunbridge Wells or Nuneaton, where lower retail capacity improves the reliability of tenancies.
Tax matters
Aficionados of the asset class point to tax-related advantages. A three percentage point stamp duty surcharge on buy-to-let and second homes, which came into effect on April 1, is not payable on commercial property. So a residential purchase of £500,000 attracts £30,000 in stamp duty, whereas a commercial building of similar value incurs £14,500.
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There is another attraction: curbs to mortgage interest tax relief, which have sown fear among many buy-to-let investors and are due to start taking effect from 2017, do not apply to commercial property. Unlike residential homes, these assets can also be invested in a personal pension or Sipp, improving the tax position for individual investors.
Investors do need to consider whether they want to be receiving high levels of annual income. For some, the four quarterly rent cheques a year written by a commercial tenant may push them into a higher income tax bracket; many will prefer buy to let, offering lower rental income but a potentially higher rate of capital growth.
Even as commercial property remains in the shadow of buy-to-let, some have seen a way to have their cake and eat it: buying a premises such as a shop with rooms above. Canny landlords will convert the upper floors into flats, thus capitalising on the growth potential of residential but eliminating the need to pay a stamp duty surcharge on purchase. Mr Watson says the changing needs of high street retailers have reinforced this shift: as retailers have moved more of their operations online, a storeroom above a shop “is worth far more as a flat than a store.”
But the high street factor has also brought greater risks to the commercial investor: the secular decline in bricks-and-mortar retailers across the UK, combined with the widespread closure of banks’ branch networks, can threaten an apparently “safe” investment. “If you go into a lot of towns at the moment you’ll see office space to let. There’s money to be made but you’ve got to be very selective,” says Mr Entwistle.
The hard work required of buyers may continue long after purchase. Sophisticated investors will do “whatever they need to do” to enhance value, says Neil Richardson, group real estate director at lender One Savings Bank. “You get the ones that collect the rent, who don’t want to do any management but like the regular income stream. The second type is prepared to roll up their sleeves, manage the asset, obtain planning enhancements and re-engineer the leases. It’s a real skill to manage high quality commercial property.”
At the Allsop auction, Chan Singh Bhogal, 56, a Birmingham-based investor, appears to fall into the former category. He has no stocks or shares, but has put his money into a portfolio of more than 20 commercial properties, mainly in the Midlands. And he is happy to buy sight unseen, as long as the conditions are right: “You don’t need to see the property, as long as the tenant is secure — a Tesco or Sainsbury, anything that’s safe — and you have a long lease.”
Rates revisited
In his March Budget, Mr Osborne announced changes to the stamp duty regime for commercial property, aligning it with the residential regime in shifting from a “slab” to a “slice” system, where the duty is payable on the portion of each transaction that falls within the price bracket, rather than the entire property value.
Duty has risen on properties costing more than £1.05m, the Treasury said, but those buying below that level would pay less under the new regime. The chancellor introduced a new zero rate band on purchases up to £150,000; a 2 per cent rate on the next £100,000; and a 5 per cent rate on properties above £250,000. But Mr Osborne’s moves on business rates were arguably more important for investors.
Business rates are a key consideration for investors. Although payable by tenants, landlords become liable to pay should the property fall empty (when a lease ends, or if a tenant goes bust).
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And this liability is significant, due to the highly retrospective nature of the way business rates are currently calculated. Thanks to a government-sanctioned delay, commercial property valuations used to calculate rates date back to 2008 — the peak of the last property cycle. Even though rental values have since slumped in many locations outside London and the south east, business rates remain punishingly high — in many cases, exceeding the annual rent a property could command.
Exactly how much falls due depends on variables including the area of the building and its position — the better located in a town, the higher the rates will be. The next revaluation is due in 2017. While this will reduce artificially high rates bills in the regions, the reverse will apply to properties in and around the capital where values have substantially increased. Retailers (who by the location-driven nature of their business typically end up paying the highest rates bills) may be put off taking a lease if high rates threaten the viability of their enterprise.
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Nick Hegarty, director of HD, a property developer that focuses on Bridgend, Wales, says extortionate levels of rates are often what lies behind an apparent bargain at auction. He cites a £160,000 property bought by HD, which carried a £29,000 annual rates bill. In order to attract a tenant, he has reduced the rent to just £4,000 a year. “We’re prepared to do that because we want to see the town centre thrive,” he says.
But he feels cause for optimism in the chancellor’s measures to ease the situation. In the Budget, Mr Osborne announced that from April 2017 the threshold above which rates are payable would rise from a rateable value of £6,000 to £15,000, predicting as a result that 600,000 small businesses would see a saving of nearly £6,000 a year. “It’s a good change,” Mr Hegarty says. “In a place like Bridgend, it will be very beneficial.”
Resource: http://www.ft.com
His right arm outstretched towards the audience, George Walker switches his gaze like clockwork between the handful of active bidders in the crowded room, as he goads them onwards and upwards. “Go on, sir, you’ve bought the train ticket. It’ll be a lonely ride home without a contract in your pocket,” he urges, gavel poised over the lectern.
The bidding rises rapidly in £5,000 increments, until Mr Walker’s hammer falls and the prize is carried off for £650,000. Attention swiftly moves on to the next lot, one of 170 to be put up for sale that day.
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/9ce74190-061b-11e6-9b51-0fb5e65703ce.html#ixzz46dfRWtaX
From his perch in the swanky surroundings of the Berkeley Hotel in London’s Knightsbridge, one might expect Mr Walker, a partner at auctioneers Allsop, to be selling exquisite paintings, lustrous antiques or highly prized jewellery. In fact, these objects of desire are more mundane: commercial premises ranging from banks, supermarkets and shoe shops to pubs and kebab houses.
To those lined up in front of Mr Walker, though, there is nothing remotely dull about this asset class, which offers the chance to own income-enriching buildings across the UK and collect rent cheques from some of the biggest and most reliable brand names in the country.
Commercial property is an investment wallflower compared with buy-to-let, which has hogged the limelight among Britain’s amateur property investors for nearly two decades. But policymakers’ efforts to douse demand for the latter through higher taxes and new limits on reliefs — as well as rising house prices — is prompting fresh scrutiny of the former. FT Money assesses whether this specialist asset class could find renewed favour with investors.
Unfamiliar territory
Why has commercial property failed to match the dizzy trajectory of buy-to-let over the past two decades? “It’s always been clouded in mystery,” says Mr Walker, speaking to the FT in the lunch break between bidding sessions. “Everyone can relate to a flat because we’ve all rented one. They see a Starbucks or a Johnsons dry cleaners as something risky.”
But for those willing to put their money into the niche, the rental yields can be attractive. Mr Walker cites a residential flat for rent in Fulham, which might produce a yield of at most between 2 and 3 per cent, excluding capital growth. In contrast, the average yield on high street shops sold through Allsop is 6.25 per cent. “You might get five years straight on the lease and four cheques a year. The first time investors go into the market they can’t believe it. Is it that easy?”
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/9ce74190-061b-11e6-9b51-0fb5e65703ce.html#ixzz46dfTqC50
Broadly speaking, the commercial market is in some ways the inverse of residential, where the value of a property resides in its vacant possession. The success of a commercial investment, by contrast, is often determined by the quality and longevity of the business tenant.
Unlike buy-to-let, where a lease might run for six months or a year, commercial leases are traditionally longer — one of the chief attractions for people seeking a reliable, long-term income stream. But the days when a buyer might expect to get a 20-year commercial lease as standard are over, says Tom Entwistle, founder of Landlord Zone, a website portal for landlords.
“Some of the big businesses will take on long leases but even they will be careful,” he says. “They have come down to 10 or five years. For a lot of businesses, three years would count as a long lease.” Banks and supermarkets have become much smarter about structuring leases with break clauses and other means of maximising their flexibility, he adds, sometimes to the landlord’s cost.
Choosing the right sector may give investors added reassurance. Convenience stores, for instance, have been stable providers of rental income in recent years, Allsop says, since by definition they require a physical presence near homes — unlike betting shops or banks, which can move online or consolidate their operations.
One of the biggest challenges that commercial property investors have faced has been the fallout from a period of shopping centre development in towns and cities, driven by overblown expectations of retail demand. Cities such as Derby, Nottingham, Rotherham or Newport have an excess of commercial property relative to shopper numbers — a reason why many investors prefer to focus their energies on smaller market towns such as Tunbridge Wells or Nuneaton, where lower retail capacity improves the reliability of tenancies.
Tax matters
Aficionados of the asset class point to tax-related advantages. A three percentage point stamp duty surcharge on buy-to-let and second homes, which came into effect on April 1, is not payable on commercial property. So a residential purchase of £500,000 attracts £30,000 in stamp duty, whereas a commercial building of similar value incurs £14,500.
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/9ce74190-061b-11e6-9b51-0fb5e65703ce.html#ixzz46dfW43bC
There is another attraction: curbs to mortgage interest tax relief, which have sown fear among many buy-to-let investors and are due to start taking effect from 2017, do not apply to commercial property. Unlike residential homes, these assets can also be invested in a personal pension or Sipp, improving the tax position for individual investors.
Investors do need to consider whether they want to be receiving high levels of annual income. For some, the four quarterly rent cheques a year written by a commercial tenant may push them into a higher income tax bracket; many will prefer buy to let, offering lower rental income but a potentially higher rate of capital growth.
Even as commercial property remains in the shadow of buy-to-let, some have seen a way to have their cake and eat it: buying a premises such as a shop with rooms above. Canny landlords will convert the upper floors into flats, thus capitalising on the growth potential of residential but eliminating the need to pay a stamp duty surcharge on purchase. Mr Watson says the changing needs of high street retailers have reinforced this shift: as retailers have moved more of their operations online, a storeroom above a shop “is worth far more as a flat than a store.”
But the high street factor has also brought greater risks to the commercial investor: the secular decline in bricks-and-mortar retailers across the UK, combined with the widespread closure of banks’ branch networks, can threaten an apparently “safe” investment. “If you go into a lot of towns at the moment you’ll see office space to let. There’s money to be made but you’ve got to be very selective,” says Mr Entwistle.
The hard work required of buyers may continue long after purchase. Sophisticated investors will do “whatever they need to do” to enhance value, says Neil Richardson, group real estate director at lender One Savings Bank. “You get the ones that collect the rent, who don’t want to do any management but like the regular income stream. The second type is prepared to roll up their sleeves, manage the asset, obtain planning enhancements and re-engineer the leases. It’s a real skill to manage high quality commercial property.”
At the Allsop auction, Chan Singh Bhogal, 56, a Birmingham-based investor, appears to fall into the former category. He has no stocks or shares, but has put his money into a portfolio of more than 20 commercial properties, mainly in the Midlands. And he is happy to buy sight unseen, as long as the conditions are right: “You don’t need to see the property, as long as the tenant is secure — a Tesco or Sainsbury, anything that’s safe — and you have a long lease.”
Rates revisited
In his March Budget, Mr Osborne announced changes to the stamp duty regime for commercial property, aligning it with the residential regime in shifting from a “slab” to a “slice” system, where the duty is payable on the portion of each transaction that falls within the price bracket, rather than the entire property value.
Duty has risen on properties costing more than £1.05m, the Treasury said, but those buying below that level would pay less under the new regime. The chancellor introduced a new zero rate band on purchases up to £150,000; a 2 per cent rate on the next £100,000; and a 5 per cent rate on properties above £250,000. But Mr Osborne’s moves on business rates were arguably more important for investors.
Business rates are a key consideration for investors. Although payable by tenants, landlords become liable to pay should the property fall empty (when a lease ends, or if a tenant goes bust).
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/9ce74190-061b-11e6-9b51-0fb5e65703ce.html#ixzz46dfYGc2V
And this liability is significant, due to the highly retrospective nature of the way business rates are currently calculated. Thanks to a government-sanctioned delay, commercial property valuations used to calculate rates date back to 2008 — the peak of the last property cycle. Even though rental values have since slumped in many locations outside London and the south east, business rates remain punishingly high — in many cases, exceeding the annual rent a property could command.
Exactly how much falls due depends on variables including the area of the building and its position — the better located in a town, the higher the rates will be. The next revaluation is due in 2017. While this will reduce artificially high rates bills in the regions, the reverse will apply to properties in and around the capital where values have substantially increased. Retailers (who by the location-driven nature of their business typically end up paying the highest rates bills) may be put off taking a lease if high rates threaten the viability of their enterprise.
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/9ce74190-061b-11e6-9b51-0fb5e65703ce.html#ixzz46dfZiurQ
Nick Hegarty, director of HD, a property developer that focuses on Bridgend, Wales, says extortionate levels of rates are often what lies behind an apparent bargain at auction. He cites a £160,000 property bought by HD, which carried a £29,000 annual rates bill. In order to attract a tenant, he has reduced the rent to just £4,000 a year. “We’re prepared to do that because we want to see the town centre thrive,” he says.
But he feels cause for optimism in the chancellor’s measures to ease the situation. In the Budget, Mr Osborne announced that from April 2017 the threshold above which rates are payable would rise from a rateable value of £6,000 to £15,000, predicting as a result that 600,000 small businesses would see a saving of nearly £6,000 a year. “It’s a good change,” Mr Hegarty says. “In a place like Bridgend, it will be very beneficial.”
Resource: http://www.ft.com
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